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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of November 12, 1998, 15,646,551 shares of Registrant's Common Stock,
$0.01 par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
October 3, January 3,
1998 1998
---------- ----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 447 $ 234
Accounts receivable, less allowances of $2,016 and $1,479 at
October 3, 1998 and January 3, 1998, respectively,
for doubtful accounts and sales returns and allowances 42,064 32,996
Inventories 50,583 32,176
Prepaid expenses and other current assets 5,141 4,713
--------- ---------
Total current assets 98,235 70,119
--------- ---------
Property, plant and equipment, net of depreciation and amortization
of $45,699 and $37,709 at October 3, 1998
and January 3, 1998, respectively 127,694 101,307
--------- ---------
Other assets:
Goodwill, net of amortization 6,061 6,204
Other assets 459 458
--------- ---------
Total assets $ 232,449 $ 178,088
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 925 $ 995
Current portion of capital lease obligations 1,540 1,167
Accounts payable 17,780 18,203
Accrued expenses 9,398 7,120
--------- ---------
Total current liabilities 29,643 27,485
--------- ---------
Long-term debt, less current portion 58,054 47,436
--------- ---------
Capital lease obligations, net of current portion 4,095 5,336
--------- ---------
Deferred income taxes 14,531 13,771
--------- ---------
Other long-term liabilities 1,771 1,747
--------- ---------
Contingencies (note 3)
Redeemable preferred stock:
Series A convertible, $.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized. No shares issued and
outstanding -- --
Stockholders' equity:
Common stock, $.01 par value per share, 20,000,000 shares authorized;
15,642,924 and 12,601,026 shares issued and outstanding as of
October 3, 1998 and January 3, 1998, respectively 156 126
Additional paid-in capital 83,372 46,530
Retained earnings 42,242 37,072
Cumulative translation adjustment (1,415) (1,415)
--------- ---------
Total stockholders' equity 124,355 82,313
--------- ---------
Total liabilities and stockholders' equity $ 232,449 $ 178,088
========= =========
</TABLE>
1
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Oct. 3, Oct. 4, Oct. 3, Oct. 4,
1998 1997 1998 1997
------ ------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $60,331 $55,130 $187,136 $160,803
Cost of products sold 48,194 42,474 146,814 122,042
-------- ------- -------- --------
Gross margin 12,137 12,656 40,322 38,761
Selling, general and administrative expenses 9,681 7,783 28,297 24,237
-------- ------- -------- --------
Operating income 2,456 4,873 12,025 14,524
Other expenses:
Interest expense, net 1,387 928 4,055 2,623
Other, net 3 20 15 48
-------- ------- -------- --------
Income before provision for income taxes 1,066 3,925 7,955 11,853
Provision for income taxes 374 845 2,785 3,462
-------- ------- -------- --------
Net income $ 692 $ 3,080 $ 5,170 $ 8,391
======== ======= ======== ========
Earnings per common share - basic (Note 1) $ 0.04 $ 0.25 $ 0.39 $ 0.68
======== ======= ======== ========
Weighted average shares outstanding -
basic (Note 1) 14,786 12,573 13,111 12,352
======== ======= ======== ========
Earnings per common share - diluted (Note 1) $ 0.04 $ 0.23 $ 0.38 $ 0.64
======== ======= ======== ========
Weighted average shares outstanding -
diluted (Note 1) 15,369 13,264 13,777 12,954
======== ======= ======== ========
</TABLE>
2
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- --------------------
Oct. 3, Oct. 4, Oct. 3, Oct. 4,
1998 1997 1998 1997
------- ------- ------- ------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 692 $ 3,080 $ 5,170 $ 8,391
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,890 2,178 8,199 6,521
Deferred income taxes 92 418 760 1,203
Stock option compensation expense -- -- -- 571
Changes in operating assets and liabilities:
Accounts receivable (net) (5,599) (6,650) (9,068) (6,081)
Inventories (7,753) (2,310) (18,407) (3,381)
Prepaid expenses and other assets (396) (92) (445) 554
Accounts payable and accrued expenses 5,030 6,679 1,855 725
Other long-term liabilities (63) (25) 24 (254)
-------- -------- -------- --------
Net cash provided (used) by
operating activities (5,107) 3,278 (11,912) 8,249
-------- -------- -------- --------
Cash flows from investing activities:
Net purchase of property, plant and equipment (9,373) (6,791) (34,377) (17,008)
-------- -------- -------- --------
Net cash used for investing activities (9,373) (6,791) (34,377) (17,008)
-------- -------- -------- --------
Cash flows from financing activities:
Repayments of capital leases (294) (336) (868) (992)
Repayment of long-term debt (238) (240) (752) (706)
Capitalization of financing costs -- -- (50) --
Net borrowings (repayments) on revolving line of
credit (21,300) 3,400 11,300 6,400
Proceeds from issuance of common stock,
net of offering expenses 36,460 -- 36,460 3,267
Proceeds from exercise of stock options 24 620 412 620
-------- -------- -------- --------
Net cash provided by financing
activities 14,652 3,444 46,502 8,589
Net increase (decrease) in cash and cash equivalents 172 (69) 213 (170)
Cash and cash equivalents, beginning of period 275 284 234 385
-------- -------- -------- --------
Cash and cash equivalents, end of period $ 447 $ 215 $ 447 $ 215
======== ======== ======== ========
</TABLE>
3
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect all
normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of October 3, 1998 and January 3, 1998 and
the results of their operations and cash flows for the three and nine months
ended October 3, 1998 and October 4, 1997. The unaudited consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles have been omitted pursuant to those
rules and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
January 3, 1998. Certain reclassifications have been made to the prior year
financial statements for consistent presentation with the current year.
Earnings Per Common Share
The Company has adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings per Share," effective December 15, 1997. Basic income
per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. For diluted income per
share, the denominator also includes dilutive outstanding stock options
determined using the treasury stock method. The following table reconciles
weighted average common shares outstanding to weighted average common shares
outstanding and dilutive potential common shares.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
Oct. 3, Oct. 4, Oct. 3, Oct. 4,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average common shares outstanding 14,786 12,573 13,111 12,352
Dilutive potential common shares 583 691 666 602
------ ------ ------ ------
Weighted average common shares outstanding
and dilutive potential common shares 15,369 13,264 13,777 12,954
====== ====== ====== ======
</TABLE>
On May 28, 1998, the Company announced that its Board of Directors had
approved a three-for-two split of its common stock to be effected in the form of
a stock dividend payable June 19, 1998 to stockholders of record as of June 8,
1998. Following the split, the Company had approximately 12.6 million shares
outstanding. Common shares and earnings per common share have been restated to
reflect the stock split.
4
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
On August 4, 1998 the Company completed the public offering of 3.2
million shares of its common stock of which 3.0 million shares were sold by the
Company and 0.2 million shares were sold by a selling stockholder.
Note 2 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method.
Inventories at October 3, 1998 and January 3, 1998 consisted of the
following:
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<CAPTION>
October 3, January 3,
1998 1998
--------- ----------
(In thousands)
<S> <C> <C>
Raw materials $ 19,077 $ 14,430
Work in process 17,964 9,917
Finished goods 13,332 8,092
-------- --------
Inventory at FIFO 50,373 32,439
LIFO Reserve 210 (263)
-------- --------
Inventory at LIFO $ 50,583 $ 32,176
======== ========
</TABLE>
Note 3 - LEGAL PROCEEDINGS
The Company and certain of its officers and directors have been named as
defendants in two putative class actions filed during September 1998 relating to
the Company's public offering of 3.2 million shares of common stock that was
completed on August 4, 1998 (the "Offering"). The actions are Bruno de Luca, On
Behalf of Himself and All Others Similarly Situated v. Quaker Fabric Corp. et
al. filed in the United States District Court for the Eastern District of New
York, and Heng Yang, On Behalf of Himself and All Others Similarly Situated v.
Quaker Fabric Corporation et al. filed in the United States District Court for
the District of Massachusetts. The plaintiffs seek unspecified damages and
rescission as a result of alleged material misrepresentations and omissions in
the registration statement and prospectus for the Offering. The Company believes
the suits to be without merit and plans to defend them vigorously. The cases are
in their initial stages and the Company is not able to predict the outcome of
the litigation at this time. The Company does not believe, however, that the
lawsuits will have a material adverse affect on either its operations or
financial condition.
5
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the
Saturday closest to January 1. "Fiscal 1997" ended January 3, 1998 and "Fiscal
1998" will end January 2, 1999. The first nine months of Fiscal 1997 and Fiscal
1998 ended October 4, 1997 and October 3, 1998, respectively.
Results of Operations - Quarterly Comparison
Net sales for the third quarter of Fiscal 1998 increased $5.2 million or
9.4%, to $60.3 million from $55.1 million for the third quarter of Fiscal 1997.
The average gross sales price per yard increased 7.4%, to $4.52 for the third
quarter of Fiscal 1998 from $4.21 for the third quarter of Fiscal 1997. This
increase was principally due to an increase in sales of middle to better-end
fabrics which have a higher than average selling price. The gross volume of
fabric sold increased 6.3%, to 11.9 million yards for the third quarter of
Fiscal 1998 from 11.2 million yards for the third quarter of Fiscal 1997. The
Company sold 20.9% more yards of middle to better-end fabrics and 15.9% fewer
yards of promotional-end fabrics in the third quarter of Fiscal 1998 than in the
third quarter of Fiscal 1997. The average gross sales price per yard of middle
to better-end fabrics increased by 6.6%, to $5.02 in the third quarter of Fiscal
1998 as compared to $4.71 in the third quarter of Fiscal 1997. The average gross
sales price per yard of promotional-end fabric was $3.44 in the third quarter of
both Fiscal 1998 and Fiscal 1997.
Gross fabric sales within the United States increased 24.9%, to $44.9
million in the third quarter of Fiscal 1998 from $36.0 million in the third
quarter of Fiscal 1997. Foreign and Export sales decreased 20.8%, to $8.7
million in the third quarter of Fiscal 1998 from $11.0 million in the third
quarter of Fiscal 1997. Gross yarn sales decreased 10.6%, to $8.1 million in the
third quarter of Fiscal 1998 from $9.1 million in the same period of Fiscal
1997.
The gross margin percentage for the third quarter of Fiscal 1998
decreased to 20.1% as compared to 23.0% for the third quarter of Fiscal 1997.
The decrease in gross profit margin percentage was primarily due to 1.)
systems-related issues which depressed the Company's production rates during
the quarter, and 2.) a significant reduction in foreign and export sales, which
have higher than average selling prices, due to deteriorating economic
conditions in various foreign markets.
Selling, general and administrative expenses increased to $9.7 million
for the third quarter of Fiscal 1998 from $7.8 million for the third quarter of
Fiscal 1997. Selling, general and administrative expenses as a percentage of net
sales increased to 16.0% in the third quarter of Fiscal 1998 from 14.1% in the
third quarter of Fiscal 1997. The increase in selling, general and
administrative expenses was primarily due to increased labor and fringe benefit
costs associated with the continued expansion of the Company's design and
contract market staffs, increased fabric sampling costs, and currency
translation expenses due to the devaluation of the Mexican peso.
6
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Interest expense was $1.4 million for the third quarter of Fiscal 1998,
and $0.9 million for the third quarter of Fiscal 1997. Higher levels of senior
debt, including higher levels of borrowing on the Company's senior credit
facility, were the primary reasons for the increase.
The effective combined income tax rate was 35.0% for the third quarter
of Fiscal 1998, and 21.5% for the third quarter of Fiscal 1997. The lower
effective tax rate in Fiscal 1997 was due to a reduction in certain deferred and
other tax liabilities related to higher levels of anticipated benefits from the
Company's foreign sales corporation and higher levels of tax credits.
Net income for the third quarter of Fiscal 1998 decreased to $0.7
million, or $0.04 per common share-diluted, from $3.1 million, or $0.23 per
common share-diluted, for the third quarter of Fiscal 1997. For a discussion of
"Earnings Per Share," see Note 2 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended January
3, 1998 and Note 1 herein.
Results of Operations - Nine-month Comparison
Net sales for the first nine months of Fiscal 1998 increased $26.3
million, or 16.4%, to $187.1 million from $160.8 million for the first nine
months of Fiscal 1997. The average gross sales price per yard increased 6.9%, to
$4.51 for the first nine months of Fiscal 1998 from $4.22 for the first nine
months of Fiscal 1997. This increase was principally due to an increase in sales
of middle to better-end fabrics which have a higher than average selling price.
The gross volume of fabric sold increased 11.7%, to 36.9 million yards for the
first nine months of Fiscal 1998 from 33.1 million yards for the first nine
months of Fiscal 1997. The Company sold 19.9% more yards of middle to better-end
fabrics and 2.1% fewer yards of promotional-end fabrics in the first nine months
of Fiscal 1998 than in the first nine months of Fiscal 1997. The average gross
sales price per yard of middle to better-end fabrics increased by 7.0% to $5.03
in the first nine months of Fiscal 1998 as compared to $4.70 in the first nine
months of Fiscal 1997. The average gross sales price per yard of promotional-end
fabric increased by 0.9%, to $3.44 in the first nine months of Fiscal 1998 as
compared to $3.41 in the first nine months of Fiscal 1997.
Gross fabric sales within the United States were $137.5 million in the
first nine months of Fiscal 1998 an increase of 24.2% over gross fabric sales of
$110.7 million during the first nine months of 1997. Foreign and Export sales
increased 0.4% to $28.9 million in the first nine months of Fiscal 1998 from
$28.7 million in the first nine months of Fiscal 1997. Gross yarn sales
increased 1.5% to $24.8 million in the first nine months of Fiscal 1998 from
$24.4 million in the same period of Fiscal 1997.
The gross margin percentage for the first nine months of Fiscal 1998
decreased to 21.5% as compared to 24.1% for the first nine months of Fiscal
1997. The decrease in the gross margin percentage was due to 1.) lower operating
efficiencies and other period costs during the first half of Fiscal 1998
associated with the implementation of the $80.0 million, two-year capacity
expansion plan which the Company began implementing in 1997, 2.) lower
production rates and manufacturing output during the third quarter of Fiscal
1998 due to systems-related issues, and 3.) heavy overtime expenses associated
with operating almost all the Company's manufacturing areas on a six and
one-half day per week schedule to meet customer demand.
7
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Selling, general and administrative expenses increased to $28.3 million
for the first nine months of Fiscal 1998 from $24.2 million for the first nine
months of Fiscal 1997. Selling, general and administrative expenses were 15.1%
of net sales in the first nine months of both Fiscal 1998 and Fiscal 1997. The
increase in selling, general and administrative expenses was primarily due to
increases in sales commissions, labor and fringe benefits, fabric sampling
expenses, and expenses associated with the devaluation of the Mexican peso. A
$480 thousand, non-cash increase in stock option amortization expense, due to
complete vesting of certain stock options as a result of the 1997 Offering (as
hereinafter defined), increased selling, general and administrative expenses as
a percentage of net sales by 0.3% in Fiscal 1997.
Interest expense increased to $4.1 million for the first nine months of
Fiscal 1998 from $2.6 million in the first nine months of Fiscal 1997. Higher
levels of senior debt financing, at higher rates of interest, were the primary
reasons.
The effective combined income tax rate was 35.0% for the first nine
months of Fiscal 1998, and 29.2% for the first nine months of Fiscal 1997. The
lower effective tax rate in Fiscal 1997 was due to an adjustment in the third
quarter reducing certain deferred and other tax liabilities related to higher
levels of anticipated benefits from the Company's foreign sales corporation and
higher levels of tax credits.
Net income for the first nine months of Fiscal 1998 decreased to $5.2
million, or $0.38 per common share-diluted, from $8.4 million, or $0.64 per
common share-diluted, for the first nine months of Fiscal 1997. For a discussion
of "Earnings Per Share," see Note 2 to the Consolidated Financial Statements
included in the Company's Annual Report on Form 10-K for the year ended January
3, 1998 and Note 1 herein.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings and
equipment leasing. The Company's capital requirements have arisen principally in
connection with expansion of the Company's production capacity, the equipment
modernization program the Company has been executing to reduce manufacturing
costs, and increased working capital needs associated with the growth of the
Company's sales.
In December 1997, the Company amended its $50.0 million unsecured credit
facility with several banks (the "Credit Agreement") to extend its maturity to
December 31, 2002. In June 1998, the Company further amended its Credit
Agreement to increase the amount of the facility from $50.0 million to $70.0
million and to eliminate covenant limitations with respect to capital
expenditures. As of October 3, 1998, the Company had an outstanding balance of
$13.0 million under the Credit Agreement and unused availability of $56.9
million, net of outstanding letters of credit. For a discussion of the "Credit
Agreement," see Note 5 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended January 3, 1998.
8
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The Company issued $45.0 million of Senior Notes due October 2005 and
2007 (the "Senior Notes") during 1997. Proceeds from the Senior Notes were used
to replace the 6.81% Series A Notes and reduce borrowing under the Credit
Agreement. The Senior Notes bear interest at a fixed rate of 7.09% on $15.0
million and 7.18% on $30.0 million. Annual principal payments begin on October
10, 2003 with a final payment due October 10, 2007. For a discussion of the
"Senior Notes," see Note 5 to the Consolidated Financial Statements included in
the Company's Annual Report 10-K for the year ended January 3, 1998.
On March 24, 1997, the Company completed a public offering of 3.4
million shares of its common stock, of which 3.1 million shares were sold by
selling stockholders and 0.3 million were sold by the Company (the "1997
Offering"). The proceeds to the Company from the 1997 Offering were
approximately $3.3 million, net of offering expenses.
On August 4, 1998, the Company completed a public offering of 3.2
million shares of its common stock of which 3.0 million shares were sold by the
Company and 0.2 million shares were sold by a selling stockholder (the "August
1998 Offering"). The Company applied its share of the net proceeds from the
August 1998 Offering, or approximately $36.5 million, to repay amounts borrowed
under the Credit Agreement.
Net capital expenditures for the first nine months of Fiscal 1997 were
$17.0 million. Capital expenditures during the first nine months of Fiscal 1998
used $34.4 million of cash. Capital expenditures for 1998 were funded primarily
by borrowings under the Credit Agreement and proceeds from the August 1998
Offering. Management anticipates that capital expenditures will total
approximately $45.0 million in Fiscal 1998, including approximately $37.0
million for new production equipment to expand chenille yarn manufacturing
capacity, increase weaving capacity, and support the Company's marketing,
productivity, quality, service and financial performance objectives. Management
believes that the net proceeds to the Company from the August 1998 Offering,
together with cash flow from operations and borrowings under the Company's
Credit Agreement, will provide sufficient funding for the Company's capital
expenditures and working capital needs for at least the next 18 months.
In addition, on July 28, 1998, the Board of Directors of the Company
approved an additional $17.8 million of capital expenditures, approximately $4.0
million of which the Company anticipates spending in Fiscal 1998 for new
manufacturing equipment and to buy land in Fall River, Massachusetts on which
the Company plans to construct a new modular manufacturing facility.
Year 2000
The "Year 2000 issue" is a result of the many existing computer programs
that utilize only the last two, rather than all four, digits to specify a year.
As a result, it is anticipated that date sensitive programs may only recognize
"00" as signifying the year 1900, and therefore not recognize the year 2000.
Although the exact consequences of such an event are not yet fully known, there
is concern that there could be at least a temporary inability to engage in
normal business operations, which, in the aggregate, could have a negative
effect on the global economy.
The Company has considered and planned for the Year 2000 issue since the
middle of 1996. In that regard, the Company has worked with outside consultants
and software vendors to
9
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address its response to the Year 2000 issue, as well as to update its overall
management information system. In addition, the Company formed an internal
project team to coordinate these efforts. In late 1996, the Company purchased a
new Enterprise Resource Planning system (the "ERP"). The ERP is intended to
enhance the Company's ability to meet its productivity, service and quality
objectives, as well as to be fully Year 2000 compliant, and carries a warranty
for the latter purpose. The ERP is designed to read all four digits of a given
year, and to convert two digit year designations, as well. The Company converted
to the ERP during July 1998, and plans for the full implementation of the system
by the end of 1998.
The Company has also initiated the process of studying its manufacturing
and other critical equipment that may be date-sensitive, including equipment
with embedded technology. The Company has organized an internal team to conduct
a survey of all such equipment. A timetable with respect to the completion of
various stages of the team's efforts is being established.
Through October 3, 1998, the Company has spent approximately $4.5
million for product acquisition, planning, conversion, and implementation in
connection with the ERP. The Company estimates spending an additional $500,000
in connection with its efforts to fully implement the ERP. Substantially all of
the hardware and software costs have been and will be capitalized.
The Company has sent surveys to its major vendors in an attempt to
ascertain their state of Year 2000 readiness and to determine the extent to
which the Company may be adversely effected by their failure to sufficiently
address the Year 2000 issue. The Company has begun to receive responses to those
surveys and a team of Company employees will continue to coordinate the
Company's efforts in this regard. Similarly, the Company has been in
communication with its major customers, and is receiving information from them
as to their state of readiness for the Year 2000.
The Company has not yet accumulated enough information to assess the
state of Year 2000 preparedness of its major suppliers and vendors. While the
failure by these entities to adequately address their Year 2000 issues could
have a material adverse effect on the Company, it is not presently possible to
reasonably estimate the amount of business that the Company could lose or the
other costs that the Company could sustain in the event of such failure.
Similarly, to the extent that other components of the global political,
financial, economic, transportation and manufacturing sectors malfunction at the
Year 2000, the Company's operations and financial strength would likely be
adversely impacted to some presently unknown degree.
The Company believes that it will be successful in its efforts to
address the Year 2000 issue and will therefore not suffer any material adverse
effect on its operations or financial condition. Although the Company is not
certain as to the nature and complete extent of the risks of failure in this
regard, such failure could lead to a "most reasonably likely worst case
scenario" where it was severely limited in its ability to perform its
manufacturing processes, deliver its products, and otherwise engage in its
ordinary business operations for an unknown period of time. At present, the
Company has no contingency plan in place for such an occurrence and has no firm
plans to initiate the creation of such a contingency plan or to further study
the uncertainty surrounding the risks of failure.
10
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and certain of its officers and directors have been named as
defendants in two putative class actions filed during September 1998 relating to
the Company's public offering of 3.2 million shares of common stock that was
completed on August 4, 1998 (the "Offering"). The actions are Bruno de Luca, On
Behalf of Himself and All Others Similarly Situated v. Quaker Fabric Corp. et
al. filed in the United States District Court for the Eastern District of New
York, and Heng Yang, On Behalf of Himself and All Others Similarly Situated v.
Quaker Fabric Corporation et al. filed in the United States District Court for
the District of Massachusetts. The plaintiffs seek unspecified damages and
rescission as a result of alleged material misrepresentations and omissions in
the registration statement and prospectus for the Offering. The Company believes
the suits to be without merit and plans to defend them vigorously. The cases are
in their initial stages and the Company is not able to predict the outcome of
the litigation at this time. The Company does not believe, however, that the
lawsuits will have a material adverse affect on either its operations or
financial condition.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
27.0 - Financial Data Schedule
(B) There were no reports on Form 8-K filed during the three
months ended October 3, 1998.
11
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: November 13, 1998 By: /s/ Paul J. Kelly
-------------------- ------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
12
<PAGE>
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0
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